What Is an Economic Man?
The term "economic man" (also referred to as "homo economicus") refers to an idealized person who acts rationally, with perfect knowledge and who seeks to maximize personal utility or satisfaction. The presence of an economic man is an assumption of many economic models.
- The economic man is a concept developed by economists to understand the behavior of humans engaged in economic activity.
- The abstraction known as the economic man was developed in the 19th century by philosophers like John Stuart Mill as part of the broader enlightenment project, the aim of which was to bring natural science to bear on all areas of knowledge.
- Later research in the late 20th and 21st centuries, referred to as behavioral economics, has challenged the legitimacy of the economic man abstraction.
Understanding Economic Man
To explain a phenomenon scientists often build models, and to build these models, scientists have to make assumptions that simplify reality. In economics, one of those simplifying assumptions is a person who is fundamentally rational in economic situations.
Unlike a real human, economic man always behaves rationally in a narrowly self-interested way that maximizes his or her satisfaction. This assumption enables economists to study how markets would work if they were populated by these theoretical persons. For example, economists assume that the law of supply and demand is describable with a mathematical equation. (That is, demand for a product is a linear function of price.)
The History of Economic Man
The idea that human beings are rational creatures whose behaviors are explainable through mathematics has its roots in the European enlightenment of the 18th and 19th centuries. Many assumptions built into the idea of the "economic man" were first developed by early thinkers like René Descartes and Gottfried Wilhelm Leibnitz and then later, Jeremy Bentham and John Stuart Mill.
In the 19th century, thinkers wanted to harness the analytical power of mathematics in the areas of politics and government. Prior to the 19th century, these subjects had been the domain of qualitative philosophers. Thinkers like John Stuart Mill, and later, economists like Carl Menger insisted that political economy (the word "political" was dropped later and the subject simply became referred to as economics) was a discipline that had to proceed with mathematical rigor in all of its principles.
In his essay, "On the Definition of Political Economy; and on the Method of Investigation Proper To It" from 1830, Mill argues that the study of political economy is not a study of applied politics. Rather, it is a limited study of man in the abstract seeking material gain in the world. Mill doesn't deny that human beings may have emotions and motivations outside of the pursuit of material wellbeing. However, those properties of a human being should be left out of the study of economics so that it can be more deductive and logical. The idea of "stripping" a human being to a bare essence in order to get to a central truth is a key component in the initial creation of the economic man.
In this formulation, economic man does not have to act morally or responsibly; he doesn't even need to act rationally from the perspective of an outside observer. He only needs to act in a way that allows him to attain pre-determined, narrow goals at the lowest possible cost.
For example, if a fisher in the Pacific Ocean can catch the same amount of fish with a disposable plastic net that he could with a more expensive hand-woven natural fiber net, he will choose the plastic net–even if that means he will eventually and unintentionally poison the fish that he depends on for his livelihood.
Criticisms of the Economic Man Concept
Economists are aware of the deficiencies of using the model of the economic man as a basis for economic theories. However, some are more willing to abandon the concept than others. One obvious problem is that human beings don't always act "rationally."
The concept assumes that the options faced by economic man offer obvious differences in satisfaction. But it is not always clear that one option is superior to another. Two options may enhance a person's utility, or satisfaction, in two different ways, and it may not be clear that one is better than the other.
A body of work in economics that has come to be called behavioral economics presents the largest sustained challenge to the analytical construct of economic man. The elements that make up behavioral economics are diverse, ranging from bounded rationality and prospect theory to intertemporal choice and nudge theory. However, they all offer the same critique of economic man: the reduction of economic actors to first principles is not robust enough to provide a full explanation of economic activity or markets.